Verbal agreements can create legally binding contracts when the required contractual elements are present. As a small business owner, you must be careful what you say because your words may result in a binding contract.
The elements of an enforceable contract in New York are:
- An offer;
- The acceptance of the offer;
- Consideration;
- Mutual assent; and
- An intent to be bound.
If one of these elements is missing, there’s no binding agreement. But business owners should understand that if all of these elements are present in an agreement—even it’s oral—it may be an enforceable contract. The same type of caution should be taken in changing or amending a valid contract. Your words can create new terms and obligations for an existing agreement with a customer, a vendor, or another party.
A verbal agreement is subject to misunderstandings and unclear responsibilities, and it will frequently end up being disputed. Remember that a verbal statement that sounds like an offer can be legally construed as one, obligating your business to terms you may never have intended.
These oral agreements typically arise when we’re excited and talking to an employee, vendor, or client about something.
An example, "You’re doing so great here! I love your enthusiasm and how you help sell the products. I’m going to give you 10% of every sale." To which our employee says, "That’s great! Thanks!" And then they go off and sell a lot more products.
They’re going to have a strong case that there’s now a commission plan in place and you owe them the compensation. Even if you now think it was too generous. Even if now you see that 10% means you won’t make a profit. You make an offer, they accepted, they relied on it, and now they expect performance on your part.
You’ve probably heard this a thousand times, but it’s true: Put it in writing.
Train yourself when talking through things with people to always say, "We need to think this through and get it written down." Or something like that. Always express that nothing is a done deal until you’ve put it in writing and signed it.
Business owners who don’t insist on written contracts take a major risk – either that they will be held to something they don’t want, or not be able to enforce something they do. Without a writing memorializing the agreement, there may be questions about the rights and obligations of the parties.
You can always come to us for help in memorializing your agreements. Or reviewing agreements others give to you. In my career, I’ve drafted and reviewed over 100,000 contracts. I actually enjoy it.
And read our articles entitled, "Contracts 101: Part 1", "Part 2" and "Part 3", as well as "Stop Overcomplicating Your Contracts" for more information on contract formation.
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
